As we head into the final month of 2017, we’re going to take a look at how the construction industry has fared this year and what we can expect for 2018. These forecasts were presented in the 2018 Construction and Design Outlook: Cheery or Dreary?webcast presented by ConstructConnect, the Associated General Contractors of America (AGC) and the American Institute of Architects (AIA).

In addition to looking at what economists Alex Carrick, ConstructConnect; Kermit Baker, AIA; and Ken Simonson, AGC have to say about the outlook for 2018, we’ll also take a look at some of the obstacles and opportunities the construction industry will face next year in the form of possible tax reforms and labor shortages.

2017 Construction Starts & Spending Forecast

While 2017 is shaping up to be a great year for construction, we aren’t going to be seeing they type of year-over-year growth in starts and spending we’ve had over the past couple of years.

In 2016, total construction spending increased 6.5% from the previous year according to data from the U.S. Census Bureau. In 2014 construction spending was up nearly 11% and in 2015 it increased 10.7%.

Ken Simonson with the AGC is forecasting a moderate increase of 3% to 5% for construction spending in 2017. This is being led by a 7% to 9% increase in private residential construction spending. Construction spending is being hurt by public spending which Simonson expects to decrease by 4% to 6% in 2017.

The AIA’s Consensus Construction Forecast Panel has construction spending on nonresidential buildings increasing 3.8%. Commercial construction spending is expected to see an 8.8% increase for the year while Industrial construction spending is going to see a year-over-year decrease of 6.6%.

Construction spending through the first nine months of 2017 totaled $917.0 billion, a 4.3% increase over the same period in 2016. Unless something crazy happens during this last quarter, the forecast from the experts should be right on target.

ConstructConnect’s construction starts increased 13.2% from 2015 to 2016. Construction starts saw a 13.6% increase in 2015. ConstructConnect’s forecast for construction starts in 2017 is a 7.9% growth over 2016 to $737.8 billion.

2018 Construction Starts & Spending Forecast

Construction spending and starts are expected to remain strong in 2018, but again the amount of growth is forecast to be a bit more subdued.

ConstructConnect’s construction starts forecast for 2018 is a 4.8% increase to $773.1 billion. Commercial construction (offices, parking garages and transportation terminals) is expected to have a 12.4% increase in starts next year with conservative growth out through 2021.

Industrial, which includes manufacturing facilities and warehouses, is expected to see a 5.6% decrease in starts in 2018 after seeing a 22.8% increase in 2017. Retail construction starts are expected to decline another 2.8% in 2018 after experiencing a 16.5% drop in 2017.

Ken Simonson has forecast a 2% to 7% increase in construction spending for 2018. Private residential will again see the most growth at 6% to 9% with private nonresidential coming in at an increase between 1% and 5%. The biggest uncertainty, according to Simonson, will be with public construction spending which he has forecast as declining by as much as 3% to growing up to 3% in 2018.

The AIA’s Consensus Construction Forecast Panel for nonresidential buildings construction spending growing 3.6% in 2018. Commercial construction spending should expect about a 4.0% increase, less than half the growth forecast for this year. Institutional construction should see about a 5.8% increase next year with Institutional only increasing by 1.1% in 2018.

Winners & Losers

Residential construction, especially single-family construction, should remain strong in 2018. Part of this will be contingent on whether millennials decide to start making the move from living in downtown metropolitan areas to becoming homeowners.

“If millennials decide they want to have single-family housing like their parents and grandparents, it will help to drive residential starts,” said Alex Carrick.

We’ve had 10 years when housing starts have been less than the 1.4 million benchmark that represents equilibrium,” added Carrick. “So, if housing ever really gets going, it’s going to drive the economy for years to come.”

Other areas where we are expected to expect to see growth include stadiums and arenas with new NFL stadiums planned in Los Angeles and Las Vegas as well as expansion of Major League Soccer in Miami and other cities in the coming years.

Lodging construction, including hotels and motels, is expected to be down in 2018 after experiencing growth in 2017.

Public construction has declined in 2017, but could get back into positive territory with airport construction, which should experience a lot of expansion in terminals and runways, as well as public education construction spending. Spending on highway construction is a big question mark as federal spending remains flat but states are continuing to pursue increases in gas taxes and public-private partnerships (P3s) to fund local road construction.

Retail construction will continue to decline in 2018 as “the bricks and mortar section of retail has really been suffering of late,” according to Carrick. Because of e-commerce, warehouse construction should continue to remain strong and grow in the coming years.

The outlook for the construction industry in 2018 is positive if we look at how architecture firms have been performing this year. “Design firms are seeing healthy conditions [which] certainly points to continued growth in construction as we move into 2018,” stated Kermit Baker.

Obstacles & Opportunities

“Construction labor looks to be a stubborn problem to resolve,” noted Kermit Baker.

Labor shortages will continue to plague the construction industry in 2018 and the years to come.

“Construction employment is still more than 10% below its previous peak,” according to Ken Simonson. “Seventy percent of firms said they were having trouble filling hourly craft positions.”

More than half the firms polled by the AGC stated they are having difficulty filling positions for carpenters, plumbers, concrete workers, electricians and bricklayers.

Tax reform is another issue that could impact the construction industry in 2018. On the nonresidential side, the proposed tax reforms could create favorable business conditions that would encourage investments in construction.

“Lowering of the corporate tax rate from 35% to 20% in the hope that it would stimulate more manufacturing, more manufacturing activity,” would be a positive according to Carrick.

For housing, the proposed tax reforms could reduce the value of mortgage interest and local property tax deductions, which would be bad for the single-family residential market.

Recent natural disasters, such as the wildfires in California and Hurricanes Irma and Maris, could play a positive role on the construction industry in the coming years. Rebuilding efforts in areas affected by these natural disasters should have a positive impact on the construction industry in the years to come.

Along with labor constraints, commodities and materials pricing will continue to have an impact on the construction industry in 2018 and the years to come. As materials and commodities prices continue to rise, it will be interesting to see if construction firms continue to make do with lower profit margins or if they attempt to increase building costs to meet demand.